Principles for Random Scrutiny of Income Tax Returns

In the Long-Term Fiscal Policy and the discussion paper on Rationalisation and Simplification of Direct Tax LawS, the finance ministry has expressed the intention of providing for random scrutiny of a sample of income tax returns. White, in the interests of cost effectiveness, acceptance of the principle of random sampling is welcome, various specific measures proposed in the two finance ministry documents are problematic. In this note an enunciation of the economic principles of random scrutiny is undertaken with special reference to the Indian income tax case. A scheme for the implementation of random scrutiny is also proposed.